SA's two smaller networks have a six-month window of opportunity to win over consumers, following a court ruling giving the Independent Communications Authority of SA (ICASA) the green light to cut inter-network fees as of today.
This comes after the South Gauteng High Court yesterday ruled ICASA's new termination rate regulations "unlawful and invalid", but suspended the invalidity order for six months to allow for the regulator to review the process and regulate within the confines of the law.
The tussle over mobile termination rates (MTR) or interconnect fees - the fees operators pay to carry calls on each other's network - started earlier this year when Vodacom and MTN took legal action over ICASA's new MTR regime that largely favours Cell C and Telkom Mobile.
As of today, MTRs payable to Vodacom and MTN will drop to 20c - half the previous MTR rate - while Cell C and Telkom Mobile will be able to charge the two larger players more than double that (44c) to terminate calls on their network.
However, the asymmetry ICASA envisaged for next year and 2016 will remain under review, with a fresh set of regulations due to be announced in October. The glide path would have seen Vodacom and MTN pay their smaller rivals four times the amount they would receive in return (10c) from March 2016.
The telecoms watchdog made the move in a bid to level the mobile playing field, historically dominated by Vodacom and MTN.
Game changer
While there has been a lot of hype and confusion over yesterday's ruling - with some under the impression that call rates would drop as the clock struck midnight - World Wide Worx MD Arthur Goldstuck says interconnect fees have no immediate effect on prices.
He says, however, the MTR regime that will be in place for the next six months does give all four mobile players - Telkom Mobile in particular - the opportunity to cut call costs for the consumer.
"There are a number of scenarios that could play out now. Telkom Mobile stands to benefit most from the new MTR structure, because the company doesn't have to worry about infrastructure, like Cell C does. So Telkom Mobile can focus their attention on aggressive pricing and I expect to see the most significant price move from them."
Goldstuck says the new rates essentially make it possible for Telkom Mobile to bring its mobile call rates in line with its fixed-line rates. "Telkom's up-front cost per call is now 20c and, given that the differential between the interconnect rate and the base cost of calls has typically been around 40c, the company would be able to drop their mobile rates to that of fixed-line rates (between 43c and 63c)."
This, he says, is a game changer for SA's smallest mobile operator (holding around 2.2% market share), which now has a massive marketing opportunity, as well as a pricing edge.
"Fixed-line calls have always been much cheaper and now Telkom can go to market and say they are doing the same with mobile."
Goldstuck says, even when the time comes that all mobile operators are "playing by the same pricing rules" in terms of a single MTR, Telkom will have the advantage of being able to market fixed-line and mobile at the same price, as a converged service.
He says it also presents Telkom with an opportunity to realise its much-trumpeted convergence plan. "Up to now [Telkom has] paid convergence lip service, but nothing has really been seen. This finally makes a converged offering of billing and services a real possibility for the company."
This almost allows Telkom to come into its own, says Goldstuck.
Telkom has welcomed the High Court decision, saying it believes the ruling is in the best interest of the industry "and will go far in reducing the cost to communicate for consumers and stimulating competition in the industry".
Cell C scenario
Although Cell C also has the advantage of steep asymmetrical rates for the next six months, Goldstuck says the third operator's situation is different in that it faces the challenge of investing in infrastructure to improve network quality.
"Cell C's big challenge is they need to match the infrastructure development of the big guys and the only way to do that is through a fresh investment injection and a massive loan from Nedbank. This is what has enabled the company to match what MTN is spending on infrastructure over the past year (R5 billion to R6 billion), but it is not sustainable."
However, he says, the MTR asymmetry does give Cell C margin to play with, and it could go one of three ways. "Firstly, Cell C could decide to invest in infrastructure and fast-track growth, while providing a better service to their customers.
"Cell C was successful in attracting a massive base away from MTN in the prepaid market, but they couldn't match the quality. I have never heard as many complaints [around network quality] as I have against Cell C in the last year. This highlights their problem."
A second option, says Goldstuck, would be to invest in bringing down the cost of calls - potentially making a massive impact, given the operator's base of 12 million subscribers.
"[Cell C] could bring costs down even below 79c - to in the region of 60c - if they invest the whole asymmetry margin. That is, going by the differential we have seen is needed between interconnect fees and the cost of calls."
Goldstuck says the third possible path is one he believes would be wisest for the company to take - a middle between the aforesaid two. "The operator could invest part in infrastructure and part in cutting call costs. This would be a combination of a competitive-edge and a better network.
At the end of the day, he says, the given scenarios fulfil what ICASA envisaged when it decided to lower termination rates and introduce asymmetry for the later entrants.
Weighing the cost
Meanwhile, while Vodacom and MTN have indicated that steep asymmetry would hinder their ability to cut costs, Goldstuck says the duopoly is not entirely the loser in this situation.
"The unstated truth about Vodacom and MTN, which they fail to mention in this argument, is that most of their calls are either on-net or to the other - and there is no asymmetry there. They pay 20c in both cases. So about 80% of their calls represent a benefit - regardless of the asymmetry - because 80% of the market is held by the two."
Given this, he says, there is no reason call costs cannot come down significantly, by 20c.
"I expect Vodacom may make a move to bring prices down. The company is usually susceptible to changes in the market. MTN, on the other hand, is usually quite slow to respond, sometimes taking up to a year to do so."
Acting CEO of Cell C Jose Dos Santos says the operator believes the court ruling is a step in the right direction and a positive for the consumer, as Vodacom and MTN have frustrated the long-term process envisaged by ICASA to increase competition in the market.
"The uncertainty over MTRs over the next three years will continue to make it difficult for smaller operators to confirm their business plans beyond October 2014. It also negatively impacts on the smaller operators' ability to bring down prices to ensure all South Africans have access to affordable communications."
Goldstuck says he suspects the six-month review period and uncertainty around what happens beyond October may also be used by networks as an excuse not to drop prices at first.
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